For nearly five decades, General Growth Properties Inc. lived up to its name -– the real estate investment trust was hyper-focused on growth. A leader in commercial real estate, specifically retail outlets and malls, the Chicago-based company’s growth strategy centered on obtaining and expanding into new territories.

But much of this strategy has changed in the last few years. A credit crisis choked off the REIT’s access to crucial cash, and sent it into Chapter 11 bankruptcy. To make matters worse the explosion of online retail that has damaged the traditional retail industry is putting pressure on mall properties. In response, General Growth Properties has been moving in a new direction.

Instead of expanding properties, the goal for GGP has shifted to focus on luxurious retail spaces that provide an all-encompassing shopping experience for the consumer – what some refer to as “destination retail.” This strategy also means getting rid of lower-performing properties.

Simple beginnings

General Growth Properties began as a small grocery store chain in Iowa by brothers Martin and Matthew Bucksbaum, but in 1954 jumped at an opportunity to become developers of the then-new retail format, the suburban mall. They began acquiring properties, taking advantage of the simultaneous retail and suburban expansion, and eventually took the company public.

The company was able to expand because of easy access to credit that helped finance numerous developments. As long as credit was plentiful, the company thrived.

Over time, they became the owners of “trophy” properties, including Water Tower Place, Chicago; Ala Moana Center, Honolulu; Tyson’s Galleria, Washington D.C.; and Glendale Galleria, Los Angeles.

In 2004, General Growth took a major risk by paying $12.7 billion to acquire Rouse Co., a purchase which effectively doubled its size. GGP took on massive debts to finance this purchase, and when lending dried up with the 2008 financial crisis, heavily leveraged General Growth found itself in serious trouble.

Not only was access to lending a problem, but the financial crisis also crushed consumer retail spending. As stores began closing their doors, vacancy rates surged at many of General Growth’s properties.

Online retail further complicated matters. A number of stores, including Circuit City, Borders, CompUSA and Tower Records, converted to exclusively online.

General Growth Properties was at a crossroads. It filed for Chapter 11 bankruptcy in April 2009 because it could not secure the loans necessary to re-finance more than $11 billion in debt. CEO John Bucksbaum, son of one of the founders, was removed from his position as part of a reorganization of top-level management.

Even after its trip to bankruptcy court, the company still retained significant value.

General Growth emerged from bankruptcy in November 2011. As part of that move, Brookfield Asset Management Inc. paid billions to purchase a large minority share, but General Growth was able to stay an independent company.

New management, new strategy

In January 2011, directors named onetime Vornado Realty Trust executive Sandeep Mathrani as CEO of the reorganized General Growth. He continues to shape the new strategy of the company that can deal with changing realities of the retail industry.

“We want to own and operate high-quality regional malls in the best markets,” Mathrani said in a conference call in November 2012. “We’ve been very focused on identifying opportunities to acquire assets that fit within this strategy, and also to identify and ultimately dispose of those assets we consider non-core that do not fit our long-term plans.”

Since exiting bankruptcy in 2010, General Growth has sold more than 70 properties, including high-profile properties like Faneuil Hall in Boston. It currently own 125 regional malls in the United States and 18 malls in Brazil comprising a total of approximately 135 million square feet.

“I think we’ve sort of reached approximately where we want to be,” Mathrani told analysts during the call. “Maybe there are a couple of assets that we might sell. We’re at our sweet spot of about 120 to 125 malls.”

General Growth also spun off Rouse Properties Inc. in early 2012. Shedding that group of what officials referred to as “class-B” malls allowed General Growth to maintain a higher quality portfolio of properties, giving it a higher valuation and better access to credit.

Reflecting the market

Still, life remains difficult for mall operators. There is no shortage of death notices for the American mall. A recent report from the commercial-retail research firm Co-Star notes that more than 200 malls with at least 250,000 square feet have vacancy rates of 35 percent or higher.

Green Street Advisors, which specialize in commercial retail research, recently forecast that 10 percent of the nation’s 1,000 enclosed malls will fail by 2022, ultimately transforming to uses other than retail.

But a closer look at the numbers reveals a more nuanced trend. Of those malls with over 35 percent vacancy, 86.5 percent were built before 2000.

"I don't think we're overbuilt, I think we're under-demolished," said Daniel Hurwitz, president and CEO of DDR Corp., a Cleveland-based REIT, during an Internal Council of Shopping Center's conference in San Diego last year.

“Retail has a finite lifespan and once you reach that lifespan, you can put up all the signs you want, and charge as low rent as you want, but that doesn't make [tenants] want to take the space."

In some ways, the market for malls is behaving a lot like the U.S. economy - what some describe as a widening gap between the rich and poor.

As competition grows for the retail consumer, unique and successful malls have grown stronger, while weak properties continue to plummet.

Retail sales have grown at destination-type malls, but the typical enclosed suburban mall has struggled.

While retail sales are on the mend, the question going forward will be which of those two types of retail is best poised to take advantage of the improved sales environment.

Many observers think General Growth is in a good position to benefit from this trend, after shedding its under-performing properties and focusing on luxurious retail destinations.

General Growth forecast

In a recent research note, analysts from JP Morgan, led by Michael W. Mueller, maintained a neutral position on General Growth Properties for the near future, citing“ offsetting factors.”

They describe how the stock is trading at a discount and that “there should be some marginal operating benefit” as the company continues its makeover. But their enthusiasm is tempered, the Morgan analysts noted, because General Growth still has in its portfolio under-performing properties it intends to sell in what could be a somewhat lengthy process. Also, they noted, the retail market can be volatile with concerns over economic demand and changing technologies.

This wait-and-see approach seems to be fairly common among analysts for General Growth Properties. General Growth and other retail REITs, including Simon Property Group, Taubman Centers Inc., and Macerich Co., contributed to malls being among the highest performing REIT category last year.

General Growth's full-year FFO, a key measurement in real estate investments, climbed 14 percent to $993.9 million, or 99 cents per share, from $874.4 million, or 88 cents per share, in the previous year.

Because of a net-income loss over the past year, General Growth’s price per earnings ratio is not applicable. The current S&P 500 ratio for the trailing twelve months is $17.46.

Going forward, the company expects 2013 FFO of $1.08 to $1.12 per share, the lower end of which is in line with analyst expectations.

General Growth’s new strategy has been drawing investor interest: . since hitting a low of $11.52 in October 2011, the stock has climbed, and in late-Tuesday New York Stock Exchange trading GGP shares were trading at $19.92.

A bit of uncertainty amongst investors may be resolving as activist investor William Ackman has backed off his demand that General Growth sell to rival Simon Property Group Inc. Ackman invested heavily in General Growth in 2008 and 2009, effectively turning $60 million into $2.3 billion as the company emerged from bankruptcy.

Ackman has been trying for the past year to push General Growth into a sale, but the company has thwarted the efforts with the backing of its largest shareholder, Brookfield Asset Management.

Ultimately,the condition of two environments will continue to shape the potential of the company. If online retail increases market share, more companies may decide to go exclusively online. And if credit becomes difficult to obtain, as it did in a few years ago, General Growth could find itself again with a liquidity problem.

Nonetheless, by reversing its former strategy of unabashed growth in favor of a more refined approach, General Growth now has the flexibility to adapt to a changing marketplace.

“We actively look at opportunities as they arise in the markets,” Mathrani said in December. “And we have the financial resources to execute our strategy.”